Due to the 2008 banking crisis, the question of how banks can protect themselves against future failures has attracted the attention of regulators, banking experts and the business media. One important area is the need for greater transparency, primarily with regard to remuneration in the banking sector, and how bank boards should improve their corporate governance practices to reduce the chances of a repeat credit crunch.
The recent publication of the draft Corporate Governance Code for banks of the Central Bank of Egypt marks an important step in this process. Banks, along with their respective boards, must pay close attention to corporate governance guidelines.
There are various good governance tips and recommendations available to the board of banks. However, I believe the following “10 Commandments” are essential to establishing a strong governance regime:
1-Set the right shade on top.
The main concerns of the board should include guiding, approving and monitoring the bank’s strategic objectives, corporate values and policies. This could be achieved through the development of a code of conduct for bank employees, management and board members. Likewise, the board of directors must clearly define areas of responsibility, levels of authority and reporting lines within the bank.
2-Adequate qualifications of board members
The board of directors must have adequate knowledge and experience in relation to each of the significant financial activities that the bank intends to carry out to enable effective governance and supervision of the bank.
To ensure that non-executive directors have knowledge and understanding of the business, the board must provide topical business awareness sessions on a regular basis and each director must receive a customized induction, training and development that will be reviewed annually with the chairman. Likewise, provision must be made for the adequate distribution of executive directors in business areas other than those for which they are directly responsible.
Non-executive directors are encouraged to spend more time in the business to ensure they can effectively participate in strategy and other board decisions.
3- Additional independent non-executive directors
To foster an independent element on the board, banks should consider that independent directors must constitute a significant board membership, and that the board must have at least three non-executive independent directors. Larger banks may have a higher proportion of non-executive directors.
Non-executive directors must be able to spend enough time in the role to assess risk and ask tough questions about strategy.
In the UK, there are recommendations for banks to appoint a Senior Independent Director (SID) whose role is to provide a sounding board for the Chairman and serve as a trusted intermediary for non-executive directors, where necessary.
4-Establish board risk governance
Banks must establish a board risk committee to work in conjunction with the existing audit committee. The risk committee would focus on risk strategy and management, free of any conflict with the audit committees’ demands. The risk committee would report regularly (as part of the annual report) on risk strategy and risk management. The risk committee has the authority to seek external advice to test its risk management assumptions, particularly in the context of risk related to significant banking transactions.
Given the importance of an independent risk management function, banks should appoint a chief risk officer (CRO) with sufficient authority, stature, independence, resources, and access to the board. This executive must report both to the risk committee and internally to the CEO. Removal of the CRO should be subject to board discussion and public disclosure.
5-Extend the scope of the remuneration committee
The scope of the remuneration committee should be expanded to cover all aspects of remuneration policy at the bank-wide level, with particular attention to the risk dimension. The compensation committee is responsible for reviewing the compensation philosophy and the main compensation programs.
To reduce perceived excessive risk-taking within banks, this committee is also expected to approve links between performance targets and pay or bonus schemes. At least half of the bonuses must be paid in the form of a long-term incentive plan.
6-Develop governance of information technology (IT)
IT governance provides the framework that links IT processes, resources, and information to the bank’s strategies and objectives, enhances effective board decision-making, and creates greater transparency and accountability. IT governance ensures that related risks are correctly identified and managed. The board must approve IT spending and provide appropriate oversight over all aspects of IT governance, including procurement, outsourcing, efficiency of systems and procedures, IT security, customer data protection, and security. adequacy of systems against fraud and money laundering.
7-Improve efficiency through board evaluation
The board and board committees must be subject to a formal and rigorous performance review with external facilitation of the process every three years. The evaluation statement should be included as a specific section of the president’s statement or as a separate section of the annual report, signed by the president. Where an external facilitator is used, this should be stated in the statement, along with their name and other significant shareholder details.
8-Manage conflicts of interest effectively
Banks must set up information barriers (“Chinese walls”) between different departments so that decisions by staff in one department are made while ignoring sensitive information available to staff in other departments that could affect their decision. Conflicts by board members or senior executives should be reported to the bank’s compliance officer. A good corporate governance practice is to establish and disclose a conflict of interest policy.
9-Monitor the government of bank clients
It is important for banks that their customers apply the principles of good governance. Banks may find it in their interest to verify the governance framework and practices of their corporate borrowers. Even in circumstances where a bank cannot directly influence the governance practices of its borrowers, it can have significant influence by “walking the talk.”
10-Track potential government failures
Banks should have a policy setting out appropriate procedures for employees who have concerns about the integrity of the bank’s operations or its staff (so-called whistleblowing policy). Employees must be able to communicate their concerns with corporate protection from retaliation from management. The procedure should facilitate the flow of confidential and direct or indirect communication to the board (or Audit Committee) outside of the internal “chain of command”. Establishing proper communication channels would allow bank staff to discuss their concerns in confidence without fear of retaliation.
conclusion
Good corporate governance is crucial in today’s complex and dynamic banking environment to ensure long-term sustainability and the trust of stakeholders, including regulators, investors, customers and employees. Therefore, it should be cultivated and practiced regularly within banks at the board and executive management level. Remember; Corporate governance is like a muscle, it must be exercised or it will atrophy.
